QuidelOrtho Corp (QDEL) 2016 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Quidel Corporation fourth-quarter and full-year 2016 earnings conference call.

(Operator Instructions)

I would now like to turn the call over to Mr. Randy Steward, Quidel's Chief Financial Officer; please go ahead.

Thank you, Operator. Good afternoon, everyone; and thank you for joining today's call. With me today is our President and Chief Executive Officer, Doug Bryant; and Ruben Argueta, Director of Investor Relations.

Our fourth-quarter and full-year 2016 earnings release is now available on ir.quidel.com, our investor relations website. We will also post our prepared remarks on the presentations tab of our IR website following the conclusion of this call, on February 8, for a period of 24 hours.

On January 23, Quidel announced a modification of its revenue reporting categories to reflect how management thinks about the strategic component of its business. In association with the change, the revenues of QuickVue and Sofia businesses will be reported within the Company's immunoassay category, and the revenues of Solana, AmpliVue and Lyra products will be reported in the Company's molecular category.

Quidel's Thyretain and Diagnostic Hybrids, or DHI revenues, will be reported in the Company's virology category, and the specialty products group, or SPG, revenues will be reported in the Company's specialty products category. To view the original press release document describing this change, please visit Quidel's investor relations website at ir.quidel.com.

Please note that this conference call will include forward-looking statements within the meaning of federal securities law. It is possible that actual results and performance could differ significantly from these stated expectations. For a discussion of risk factors, please review Quidel's annual report on Form 10-K, registration statements and subsequent quarterly reports on Form 10-Q as filed with the SEC.

Furthermore, this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast today, February 8, 2017. Quidel undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this conference call, except as required by law.

Today, Quidel released financial results for the 3 months and 12 months ended December 31, 2016. If you have not received our news release, or if you would like to be added to the Company's distribution list, please contact Ruben at 858-646-8023.

Following Doug's comments, I will briefly discuss our financial results and then we will open the call for your questions. I will now hand the call over to Doug for his comments.

Thank you, Randy, and good afternoon, everyone. For today's call, I will give you my thoughts on the fourth quarter. I will provide some insight into the ongoing influenza season, based on our Virena data, and I will conclude with comments on our longer-term growth initiatives.

Total revenue for Q4 2016 was $52.8 million, within the range of $52 million to $53 million that we had suggested prior to our tenants at the JPMorgan Health Care Conference in early January, and essentially flat for the fourth quarter of 2015. Although the CDC's ILI data indicated a slower start by three weeks than the 2014-2015 influenza season and similar to last year's start, I think now armed with our Virena data and graphs by state, that the current season looks to have started reasonably on time, earlier in some states and later in others.

And what we experienced was not so much a late start to the season, but untimely ordering by our distribution partners driven perhaps by a couple of factors. First, distributors appear to rely heavily on ILI data, which don't provide an indication of either volume of patient tests or prevalence.

And second and perhaps more important, given last year's milder season, our distribution partners may have been somewhat hesitant, understandably, to purchase significant inventory in December, and may have still been hesitant even if we had given them access to Virena's real-time test data. And of course they did not purchase significant inventory. In fact, inventories at distribution of our influenza products were roughly two-thirds of what they were at the end of 2015.

Except for shipments of our influenza products to distribution in the last few weeks of December, our performance in the quarter was actually slightly better than we had anticipated. Sofia placements were on track and we ended the year with over 17,500 instruments. Our product development groups continued at their same rapid pace, and we gained further momentum with our efforts to commercialize our molecular products, most notably with Solana.

Overall, from my perspective, we had an excellent quarter. Regarding the ongoing influenza season, Quidel is obviously uniquely qualified to comment given our access to actual patient test data. As of the end of 2016, about 3,500 Sofias now have the routers needed to transmit the identify data through our Virena cloud, up from about 1,000 at this time last year. From that group of customers, about 800,000 patient test results were transmitted through our cloud in 2016.

In January 2017 alone, we captured 191,000 patient test results. And on the first day of February, to give you a feel for the rate of acceleration, we received 11,500 patient test results. Of course, at this point, while we have very good coverage in some states, there are other states where the coverage is still not dense enough for us to reliably make comment. Having said that, in our data set, 29% of patients now being tested are positive for influenza, although it varies noticeably by state.

For example, in California, the positivity rate has been on the steady climb since early November, exceeded 50% by the middle of January, and is now hovering around 40%. Arizona, which started in mid-November, is at 21%. Florida, which started at Thanksgiving is now at 35%, mainly in just a couple of counties. Massachusetts started mid-December and is now at just at 22%, but climbing.

Based on Virena data in the aggregate, we continue to regard the level of influenza in the United States to be high. That is greater than or equal to 25% of those tested for influenza are positive. How long the season will persist is clearly unknown. In a few states, the Virena charts are hinting the positivity rates maybe plateauing, but in general, both the testing and positivity rates continue to mount in the United States at this time. And not surprisingly at this point, in the influenza season, a high percentage of the positives are influenza A.

While Sofia Influenza A plus B does not sub-type, members of our scientific advisory board recently advised us that most positive influenza cases were a variant of H3N2, against which the current vaccine does not seem to provide adequate protection. In fact, at one university hospital system in the upper Midwest, we were told that of those patients who had tested positive for influenza A, 80% had been vaccinated.

There are a number of cities that have been hit especially hard, but in particular, if you are traveling to the Seattle, Pittsburgh, Chicago or Miami Metro areas, please be careful. Wash your hands routinely and don't touch your face.

Now, on to progress with product development and our longer-term growth initiatives. As a reminder, we have been on a steady product development pace for some time. Since 2009, we have submitted over 30 510(k) packages to the FDA and have had over 25 FDA clearances and product claims, with 4 CLIA waiver designations.

In 2016, we maintained that pace with four Solana assays FDA-cleared. Those were strep complete, flu A plus B, Trichomonas vaginalis, HSV VZV. We also received CE marks for four Lyra assays for the most common culprits of community-acquired pneumonia in Europe. We received CLIA waiver for Sofia Strep A plus read-now mode which allows our higher volume users to run the assays in batch mode during peak periods. And, we exited the year with another four assays, plus the Sofia 2 instrument, at the FDA undergoing active review.

Moving forward in 2017, we anticipate FDA clearance and CLIA waiver for Sofia 2 soon, and we will train the salesforce at our global sales meeting next week. We anticipate having the instrument inventory needed to do the cutover from Sofia to Sofia 2 this quarter. Initially, the instrument will run the existing influenza RSV and strep cartridges with other assays to follow. Later in the year we will launch the Sofia Lyme and vitamin D, pending FDA clearance.

For Solana, there are four assays in development, two of which we anticipate will receive FDA clearance this summer. And finally with Savanna, we continue to finalize adjustments to the cartridge to enable high-volume manufacturing and have begun the development of assays in a mini-panel format, so that we can deliver 20 or more analytes at or near instrument launch in 2018.

In summary, there was a lot to be proud of in 2016 and in the fourth quarter in particular. To the Quidel team who listens to these calls diligently and faithfully reads the transcripts later, let's keep going. Let's fortify, attack and forge ahead. Many organizations are forced to focus on just one of these strategies, but because of your talent, we have made great progress with each. I look forward to seeing what we can accomplish in 2017. Randy?

Thank you, Doug. As we reported earlier today, total revenues for the fourth quarter of 2016 were $52.8 million. This compares to $52.4 million in the fourth quarter of 2015. Two important items to point out in the quarter. First, the fourth quarter of 2015 had 14 weeks in the quarter as compared to 13 weeks in 2016. If you added a week to the end of the period, we might have realized an incremental $5 million to $8 million in revenue.

Second, the fourth quarter of 2015 had $1.9 million in Grant revenue, while the fourth quarter of 2016 had no Grant revenue. As we had mentioned in our third-quarter call, we received the final milestone-based cash payment from the Bill and Melinda Gates Foundation in the third quarter of 2016. Thus, reporting all remaining Grant revenue associated with that arrangement at that time.

Immunoassay product revenues, which include all QuickVue and Sofia lateral flow products, increased 5% to $36.5 million in the fourth quarter of 2016 as compared to $34.8 million in the previous year. Within this category, Sofia products grew 17% from the fourth quarter of 2015 to $17.5 million, while QuickVue revenues decreased 4% to $19 million.

Influenza revenue in the quarter was $23.3 million as compared to $22.9 million last year, and this quarter's mix of Influenza revenue between Sofia and QuickVue was 65% to 35%, respectfully. We anticipate the trend towards more Sofia Influenza revenue to continue as we move forward.

Revenue in the virology category, which includes products from Diagnostic Hybrids, decreased 12% in the fourth quarter to $10 million. We are seeing some of the virology products shifting to molecular solutions, including our own. We realized a 2% growth in Thyretain in the quarter. Going forward, we believe that with a couple of product extensions to the thyroid category, this business should continue to be a nice growth driver over the coming years.

Our molecular product category, which includes the Lyra, AmpliVue and Solana brands, increased 72% in the quarter to $2.7 million. All three product lines, Lyra, AmpliVue and Solana, saw revenue growth in the quarter, which is encouraging. And Solana realized the most significant growth, owing the continued growth of Group A Strep as well as the introduction of multiple new Solana products in the back half of last year. We anticipate continued growth from the molecular category in the coming year as we receive the full-year benefit of last year's new products in addition to contributions from new Solana assays that are scheduled to come online in 2017.

Our specialty products, which serve the bone health, autoimmune and complement research communities, grew 23% from the fourth quarter of 2015. The Immutopics acquisition contributed the majority of the revenue growth. Our Other Product category, which primarily includes grants and royalties, was $800,000 in the quarter versus $2.4 million last year. The majority of the difference was the lack of Grant revenue associated with the Bill and Melinda Gates Foundation.

From a platform perspective, we remain very encouraged by the continued commercialization of our Sofia and molecular product lines. These products grew 22% from the fourth quarter of the previous year to $20.2 million and made up 38% of total revenues in the quarter.

Gross profit in the fourth quarter of 2016 decreased $600,000, mostly the result of lower Grant revenue. Gross margin in the fourth quarter was approximately 64%, compared to 65% in the fourth quarter of 2015. The largest contributors to this margin decrease was lower Gates Grant revenue and higher instrument depreciation from our Sofia and Solana placement.

R&D expense decreased by $2.4 million in the fourth quarter, as compared to the fourth quarter in 2015, primarily due to reduced spend on Savanna and Sofia 2 platforms. Sales and marketing expense decreased by $600,000 in the fourth quarter of 2016, compared to the fourth quarter last year, largely due to reduced compensation expense. G&A expenses decreased by $900,000 in the quarter, primarily due to the elimination of a medical device excise tax and lower compensation expense.

Overall, operating expenses were lower in the quarter than they were in the fourth quarter of 2015 and lower than the third quarter of this year as well. We continue to monitor our expenses diligently and manage the business prudently as we remain dedicated to growing the top line. In the fourth quarter, interest expense was $3.1 million of which $2.7 million relates to our convertible senior notes. Of that $2.7 million, $1.4 million relates to the cash portion of the interest expense.

In the quarter, we recorded an income tax provision of $4.7 million against pretax income of approximately $2.8 million. Due to the cumulative effect of current year and prior-year's losses, Quidel reported an valuation allowance of $3.8 million, representing an allowance against the net federal deferred tax asset value. We expect this allowance will be reversed as the Company realizes pretax income in the future. In 2017, any federal income tax expense to be reported will be netted against the federal valuation allowance.

Net loss for the fourth quarter was $1.95 million, or $0.06 per share, as compared to a net loss of $400,000, or $0.01 per share for the fourth quarter of 2015. On a non-GAAP basis, net income for the fourth quarter was $5.8 million and $0.17 per diluted share. This compares to last year's net income of $3.5 million, or $0.10 per diluted share.

Now, I will briefly talk about the 12-month financial results. Revenues for the 12 months decreased 2% over the prior-year to $191.6 million. The major contributor to the decline was the less than average influenza season in 2015-2016 time period. We remain optimistic on our revenue outlook going into 2017 due to the following.

First, we appear to be off to a very good start to the first quarter. We have placed several thousand additional Sofia instruments in 2016 which we believe can drive further test utilization this year. Third, we've progressed with respect to our Sofia Lyme and vitamin D assays that suggest to us that the FDA clearance and commercialization of these products is near term.

Fourth, we received multiple 510(k) clearances for our Solana molecular product line in the back half of 2016, that positions us nicely for molecular growth in 2017. Immuno product revenue declined 7% in the year to $121.4 million. This was from $130.3 million in the prior year. Within this category, Sofia revenue grew 4% to $50.9 million, while QuickVue revenue decreased 14% to $70.5 million.

Revenue in the virology category decreased 8% in the year to $40.1 million. This decrease was consistent with the reasons for the decline in Q4 as well. Thyretain grew 7% for the year. Our Molecular revenue category grew by 75% over the prior year.

All three molecular brands showed a minimum double-digit revenue growth from last year, with Solana products growing the most, led by the commercialization of Solana Strep A. Our specialty products grew 25% from 2015 to $11.2 million in 2016. Contributing to the growth was revenue associated with the Immutopics acquisition in the first quarter of 2016.

For the year, our Other product category which primarily includes Grants and Royalties increased 23%. Again, a link to the Grant revenue associated with the Bill and Melinda Gates foundation. In 2016, new products, which is composed solely of Sofia and molecular, grew by 12% over 2015 to $60.4 million, which now makes up 32% of total revenue.

Gross margin for the year was 62%. This compares to the 63% for 2015. The decrease is due to unfavorable product mix and lower manufacturing efficiencies associated with lower production volume.

For 2017, we believe that with normal flu volume in the back half of the year, we have an opportunity to improve our gross margin by 200 to 300 basis points. We continue to believe that with the addition of our new product portfolio, we should ultimately achieve gross margin at or above 65%.

R&D expenses for 2016 were $38.7 million. This compares to $35.5 million last year and was just under our publicly communicated target. During the year, our spend was focused on the Savanna platform, further Solana assay development, as well as the developed tied to Sofia 2. For 2017, we are estimating our total R&D expenses to be in the range of $33 million to $35 million.

Sales and marketing expense for the year remained consistent with 2015 at $47.8 million, and again, at the lower end of our communicated range. As we mentioned previously, we believe our sales and marketing organization is the right size to support our growth over the next couple of years. For 2017, we estimate the sales and marketing expense will remain consistent with our 2016 full-year spend.

G&A expenses decreased by $2.4 million in the year and this decrease versus the prior year was mostly the result of one-time business development activities in 2015 that did not repeat this year, as well as the suspension of the medical device excise tax. Net loss for the 12 months of 2016 was $13.8 million or $0.42 per share as compared to a net loss of $6.1 million or $0.18 per share in 2015.

On a non-GAAP basis, net income for the 12 months of 2016 was $6.2 million, or $0.19 per diluted share, and this compares to net income of $11.2 million, or $0.32 per diluted share in 2015. For the 12 months ended December 31, 2016, depreciation, amortization and other was $23.5 million as compared to $23.4 million in 2015. For the year, our net cash position decreased by approximately $22 million.

During the year, we spent $11.9 million on property and equipment including intangibles. We spent $20.2 million to purchase shares of our common stock as well as $4.5 million to repurchase some of our outstanding convertible senior notes. We also used cash of approximately $5.1 million to acquire Immutopics in the first quarter. As of the end of December, the Company had $169.5 million in cash on the balance sheet.

With that, we conclude our formal comments for today. Operator, we are now ready to open the call for questions.

(Operator Instructions)

Nicholas Jansen, Raymond James.

Hey, guys. Thanks for the questions. First, thanks for all the detail on the Virena patient test results thus far. I just wanted to better understand or maybe conceptualize what those results mean in terms of ordering patterns from distributors.

Have you seen January kind of tick back up as we think about the nearer-term revenue growth trends? I know you don't like to provide any sort of top-line guidance, but it would be helpful to kind of better understand how those numbers would result in nearer-term revenue.

Thanks, Nick. First, starting with distributor inventories at year end. They exited the year with roughly 1/3 less inventory than the prior year, which is probably about a week's worth of inventory.

Having seen some demand demonstrated by their out sales, I presume that triggered the ordering that began the first week in January. Through the first five weeks of the quarter, I would say that ordering by our distribution partners has been significant.

That is very helpful. It was interesting to hear that the update on Lyme and vitamin D. You guys have made significant progress there. I just kind of wanted to get your thoughts on the timeline of commercialization and how we should be thinking about that as a contributor either in the back half of 2017 or certainly into 2018.

To be concise, both of those products are expected to make some contribution in the back half of the year. We think we are on pretty good footing. At the moment the products both look pretty good. I don't see any reason why we wouldn't be commercializing the product in the back half.

And then my last question, just in terms of your balance sheet, you guys have done a great job of delivering good cash flow. You raised the money a couple of years ago. It is still sitting there. I just wanted to get your thoughts on the M&A landscape as we sit here, desires to accelerate, diversification, any change in market multiples, just your broader thoughts on the M&A outlook will be helpful. Thank you.

We continue to look at targets, Nick, as we've said before. We see a number of opportunities that are on the smaller end and have pursued to some of those. Not always with the result that we had hoped for, but we have a pipeline of things that we are looking at and I would say that we have never been more aggressive at looking than we are today.

I will hop back in queue. Thanks, guys.

You are welcome, Nick.

Jack Meehan, Barclays.

Hi, thanks, good afternoon, guys. I wanted to start with Sofia 2. Doug, what gives you the conviction and the pending approval, what do you think has led to the delay with the FDA? And then once it's out, do we need to wait until next flu season to really start pushing it with customers?

We are anticipating Sofia 2 soon. I can't really comment further, but I would just say we are anticipating clearance soon. I would be surprised if we did not get clearance soon. In the meantime, we still continue to place Sofia. We are training the sales team, as I mentioned, on Sofia 2 next week. We are manufacturing Sofia 2 instruments now.

I think that would suggest that we are somewhat confident as well, Jack. We anticipate doing the cutover this quarter, but when it happens, within a few weeks either way, I don't think will have any real bearing on revenue or our forecast for the year. No, I don't think we will be waiting for the next influenza season to introduce the product in the market. What we see now is a reasonably good influenza season and provided that moves forward for the next few weeks, I think our guys are going to be out there with Sofia 2.

That is great. And then I wanted to stick with Sofia and just talk about the retail relationship that went live in the fourth quarter. Can you maybe discuss the experience there and how Virena worked? What do you think the potential is to expand that relationship and other retail relationships in 2017?

Well, I tend, and maybe inappropriately, but I tend to lump all the alternate sites into one. There is retail. There is pharmacy. There is urgent care. And I would say that Virena certainly has been important in that segment. I see, from our perspective, that we need to do perhaps a better job of making sure all the routers are on soon after we install. But for the most part, I think we are doing well in that segment.

Recently, I visited a very large urgent care chain. I can tell you that they look at the data routinely on MyVirena.com and they use it in a number of different ways, including inventory and also including comparing themselves to the market, including understanding how and when they make staffing decisions, et cetera. We are seeing probably more demand for the data on that alternate site side than we have necessarily at the physician level so far. Does that answer your question?

It does. Thank you. Then just the last one and I will wrap up here. As you reflect on the Solana launch and how things are going, could you maybe just give some data around how system utilization has been, maybe the number of tests that will get run in a run, if you have that available? And then with some of the new menu that has been extended in the second half of last year, how the cross-selling in the menu for customers is going. Thank you.

Solana is going well. We have had a few large network closes early on. Those have been obviously -- predominantly, our initial Group A Strep product. In our weekly re-agent revenue run rates have ticked up as a result of some of those going online. It is hard, really Jack, to give averages -- or I should give averages -- but I'm not sure they are meaningful. Because we have physician offices that have a Solana or two, and then we have very large customers. One of the larger customers, for example, does -- well, the contract is for 80,000 Group A Strep tests per year and that particular customer has six Solanas.

In other situations we have close to across an entire network, some of the sites are high-volume, some are low-volume, but they all have a Solana. So the ones with low-volume obviously are not very indicative. With Strep Complete and HSV VZV, the cross-selling that you are talking about, Jack, we think that we are uniquely positioned at the moment in that no other manufacturer has those products. I am excited to see what those two assays will do for us moving forward.

The ability to batch and the low total cost of ownership have also been helpful. I expect that to be even more important moving forward. It is not clear to me yet that there is a great deal of cross-selling -- or not cross-selling but cross-purchasing, not quite yet, because of course a couple of those assays just got FDA cleared. Stay tuned. I am going to our national and global sales meeting next week. We will be talking about all of this, and it will be an important part of what we are doing in terms of the two or three things that we are focused on commercially.

Great. Thank you.

You're welcome.

Bill Quirk, Piper Jaffray.

Great. Thanks, good afternoon, everyone. This is Alex Nowak filling in for Bill today. I was just wondering if there is any way to normalize the impact of the distributor orders in the quarter? Just quick math for me suggests it is around a $3 million to $4 million impact. I'm just curious if I was in the ballpark?

I am not sure, Alex, what you mean, $3 million to $4 million.

With inventory about one-third lower than what it normally is in Q4, exiting Q4. Would that be considered about a $3 million to $4 million revenue impact for --?

A little higher than that. So I will give you a little bit more detail. So instead of 1.5 million tests, last year they had a million tests. And so 0.5 million, just to do even math, at $10, it should be a little on the low side, right? That is about $5 million, right? It is in that neighborhood. That is as good as I can do, Alex, without a calculator.

That is fine. Thank you. I appreciate it. And then the second question is, using your Virena data, as well as other data you might have from prior flu seasons, can you say how this flu season compares to other seasons? Do you think it is equivalent to the 2014-2015 season or do you think it is closer to the 2015-2016 season?

What I have learned now is every season is a little bit different. We've tried to describe normal and it has not really been good for us. We were hoping that 2014-2015 would be normal, moving forward and clearly, last year proved that, that was not the case.

Here, we see that certainly ILI data would tell you this looked like last year, but when I looked at the states and actually saw test data and positivity rates, I could tell early on that this was different than last year. The question then becomes, Alex, how long does this keep going? We have seen years where typically in the middle of February most of the states would start peaking in terms of positivity rate. And that it would start to fall off and hopefully ordering into March to some degree.

But at the same time, if you were a large distributor, you are not necessarily interested in building inventory in March. We also see our distribution partners slowing down ordering typically at some point in March. Just the question of how long does it go before it starts to fall off? Right now, we see some states, a couple at least, where it appears to have peaked a little bit. But for the most part, we still see most are actually in the climbing phase.

Okay. Thank you. Just last question and I will jump back in the queue. Gross margins are typically higher in Q4 and Q1. I noticed that the margin didn't come down year over year. So I was just curious, what is driving the margin pressures? Is it largely around the influenza business and the stocking at distributors?

It is. It is around influenza. I would say -- Randy, help me here. I think gross margin, we say, is typically north of 75%.

For the flu product, yes.

For the flu product, yes. And so that drives a lot of our average.

Perfect. Thank you.

You're welcome.

Brian Weinstein, William Blair.

Hey guys, thanks for taking my questions. My question's really around -- the first one is around market expansion efforts. You guys have really tried to push the idea of increasing flu testing. Virena is a part of that. You have done some other marketing pushes.

Can you talk either quantitatively or qualitatively about how you view those market expansion efforts? Has the market expanded irrespective of what we are seeing in the season? Also, can you give us an update on where you think that your market share is within the flu category? Thanks.

That is a bunch, Brian. Just taking notes to make sure I hit all the points. First of all, I do think it is pretty clear that we have expanded the market. I don't think it is just us. I think just to be fair, BD's introduction of their instrument was helpful too. I think it is pretty clear, given our cannibalization rate from QuickVue, that has been the case.

Of course we would like to see, moving forward, an acceleration of our cannibalization of QuickVue, but through last year, I think [Randy], we were still at around 35% cannibalization, which says that the $50.9 million, or whatever it is, in Sofia, a bunch of that is new. Because it can't all be share gain. Because we don't really see huge share gains that would be noticeable, it is very hard for us to calculate precisely what market share is. There is too many ins and outs.

In some years, we've said we thought we were able to gain as much as 4% to 6% market share. That would give you an example at this point. Overall all markets included, I don't think we have probably more than 40% to 50% in that range. I mean, that would be a wide range, but I am sure I can't be a whole lot more precise than that. We have some direct business from some distribution, but it is very difficult for us to figure out precisely where we are at.

In terms of Virena, I do think Virena is very helpful for us in terms of expanding markets. That is certainly true. I think it will be moving forward with other products like Lyme. I think you heard recently out our scientific advisory board that it would be very useful to have C. diff data go into our cloud. So that they could see across the network where certain populations had issues with C. diff.

Did I leave anything out, Brian? You asked me several in a row. I hope I got them all.

No, I think you did. Thank you for all that. Second question is around molecular in general. Can you talk about, was there any kind of stocking or anything going on as you were building up a little bit of the Solana? You signed a couple of big deals I know.

And then what does the funnel look like specific for molecular next year? Do you have a good read as to what the potential account closers are at this point or does that take a longer time to develop that funnel? Thank you.

First, on the stocking, I would say we actually attempted to get our distributors to take on board a little more inventory when we had first launched Flu A plus B. Unfortunately, at this point, we are just basically shifting what customers are ordering. There still may be a minor amount of inventory build at, at least, one or more of the distributors I noticed, but it is not meaningful.

What we are seeing right now is basically very closely tied to customer orders. Our biggest concern right now, Brian, is when we install Solana, for example, we want to install and all the QC and all that done, and we want it up and running and then we want reorders. Our biggest challenge right now is what I would call order to cash. Can I tighten that up a little bit?

In terms of order flow, I would say it is a bit chunky. We recently had our largest single instrument close. In other words, a number of instruments. We had an account that ordered 86 instruments. And then we talked before about some other large orders in terms of the reagent trail as well.

Again, getting 86 instruments installed, getting them up and running, that right now is our biggest challenge. If I am critical, I would say we have got a little bit to go still to tighten all of that up to get it going more productively and smoothly. But overall, I think we're comfortable with the orders. Our issue is not orders.

Okay. Thank you, guys.

Sure.

(Operator Instructions)

Tycho Peterson, JPMorgan.

Thanks. Doug, on Sofia 2, can you maybe just talk a little bit about a couple of things? How do we think about the install basis of the Sofia instruments? What level of cannibalization you guys are modeling over the next year or two? Where do you think consumable pull-through goes on Sofia?

And have you worked through the things you needed to work through from your end? I think at our conference you talked about some of the timelines being around certifying the wireless component. So has that all been addressed from your end?

I will go backwards. All of those things are being addressed and they are necessary for us to launch. We are getting to the end of that process, including FDA clearance. It is true that it became a more complex product when we included Dewilde as part of the program, and a great deal of learning there, which will be useful moving forward. But that is for the most part behind us.

In terms of Sofia 2 and cannibalization, there will be some cannibalization but it will be opportunistic. One example is, I have a customer who is a large Sofia customer, perhaps in a network, decides they really do want to send data into the cloud and to access a prevalence data. Should I ship them a router? Or would it be better to ship them a Sofia 2? Because the Sofia 2, including all, is less than the router.

It would be more opportunistic then by design. Eventually, obviously, we will have assays that require Sofia 2 and require the horsepower, if you will, of Sofia 2. And it would be at that time that we would obviously ship additional instruments. Yes, Randy points out, we are about a year away from that.

And then you also asked about the size. We are still moving towards that magical $10,000 per box, per year. We think that adding other assays other than flu is certainly going to help us get there.

Okay. And then maybe switching gears. Virology has continued to decline. Where should we think about this trending going forward? Where do you think it is going to balance out for you guys?

Again, that is such a small number of customers. When you lose one of these customers, it tends to be an issue. Some of the time, obviously, we would prefer that those customers moved our own molecular method. But what we are seeing is some level of those assays, the DHI assays, moving over to molecular.

It has flattened a bit, but it is no secret that initially, we did have some customers make the decision to move over to molecular. Certainly, with Solana, we are making it easier for them, because we have HSV VZV combined, which they were running both of those by us. We can certainly do it at a level that is economic for our customers.

Okay. And then I know you had a question earlier on share dynamics and flu. Can you maybe talk about the broader point of care market? Obviously with the [Lyra advent and now assay and danaherb]. Are there opportunities to pick up incremental share across point of care channels?

With our Solana product, Tycho?

Yes, yes, and molecular.

Yes, we believe so. We believe so. I can't tell you we are seeing a great deal of traction yet, but we do already see customers who are running Strep who are now also running Flu. That has been helpful. And we have some customers in larger settings that we are waiting for, before they started Strep.

Sometimes, it is hard to launch an instrument platform with just one analyte, and that certainly was the case with launching Group A Strep. But now with -- how many cleared are we? We are at six now, yes. Strep product plus Strep Complete and then four others, right? With the expanding menu, I think that, that should be helpful too with that Influenza business.

Okay. Thank you.

You're welcome.

That is all the time we have today. Please proceed with your presentation or any closing remarks.

Thanks, everyone, for your support and of course for your interest in Quidel. In my view, we had another productive quarter, and I believe that we are well-positioned to achieve our growth objectives in 2017. All the best.

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